As a planned giving consultant who works with charities and their supporters, I am very thankful for the tax incentives Congress provides for philanthropic efforts. However, I've been disappointed that there has been no tax incentive to fund large lifetime charitable gifts through large IRA (or other retirement plan) withdrawals because of negative tax results.
Lo and behold, we now have good news. Tax legislation related to the Katrina disaster has now removed these tax impediments - through the end of this year only - for lifetime contributions funded by large IRA withdrawals.
This is most welcome news because IRAs would normally be the "asset of choice" for lifetime charitable gifts since family heirs receive a less attractive income tax result with IRAs than with most other inherited assets.
Here's how it worked before this Katrina legislation. Even though an IRA withdrawal is fully taxable, a donor would hope to receive a full deduction to offset this income if the withdrawn funds were in turn given to charities. However, such charitable plans were rarely carried out because the deductibility of cash contributions in any one year was limited to 50 percent of one's income (adjusted gross income).
Now the Katrina Emergency Tax Relief Act of 2005 offers a way out of this dilemma by increasing the general limitation for deductibility of cash contributions to 100 percent of adjusted gross income. To qualify for this "relief," the gifts must be made to qualifying tax-exempt public charities (not only for Katrina relief) between Aug. 28, 2005, and Dec. 31, 2005.
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Individuals who make smaller IRA withdrawals to fund charitable gifts have usually not been hurt by the percentage limitations on deductibility. However, for those contemplating larger IRA-funded charitable gifts, this legislation is a big deal. We have just a couple of months left to use this legislation to enhance our philanthropic goals and efforts.
Interested parties should certainly work with their trusted advisors, since there is a 10 percent early withdrawal penalty which usually applies to distributions before age 59½, and the increased income from IRA withdrawals may affect other tax deductions and credits. Also, differing results may occur on the income tax returns of various states.
I hope that this letter will serve as a call to action for those who would like to make a real difference through a lifetime gift from their IRA or other retirement plan. It is ironic, and perhaps fitting, that a devastating hurricane has opened the doors for many Americans to do even greater things for society.
Johnson, CPA, CFRE, lives in Fargo.
